As Ad-Supported Memberships Climb, Is Now a Golden Opportunity to Buy Netflix Stock?

Netflix (NASDAQ: NFLX) saw strong growth in ad-supported memberships when it reported its second-quarter results, although investor reaction to the report was largely muted. Its stock is nonetheless still up about 33% on the year.

Let's take a closer look at the streaming service operator's Q2 results, how ads will play a growing role in the company's future, and whether now is a good opportunity to buy the stock.

Adding ad-supported members

Netflix reported strong second-quarter results with revenue jumping 16.8% to $9.6 billion. The company has seen revenue growth steadily accelerate over the past year, as seen in the table below.

Earnings per share (EPS) , meanwhile, climbed from $3.29 a year ago to $4.88, a 48.3% improvement.

Global streaming memberships rose 16.5% to 277.65 million members. Meanwhile, the company said ad-supported memberships soared 34% sequentially.

Netflix said that ad-supported memberships made up approximately 45% of sign-ups where it offers the service. In the U.S., these memberships cost $6.99 a month to stream on two devices simultaneously along with the ability to download shows and movies. The company has been phasing out its basic subscriber plans in the U.K. and Canada, which has helped with the growth of ad-supported plans. It now plans to start phasing out basic plans in the U.S. and France.

The company said it is on track to achieve critical subscriber scale for advertisers in its ad-supported countries beginning in 2025, although advertising won't be its primary growth driver this year or next. However, it does see advertising as being a longer-term revenue and profit driver. The company has also introduced new advertising features, including showing ads when shows are paused. It is also building its own adtech platform that it will test in Canada later this year and more broadly next year.

Notably, Netflix has recently begun to incorporate live events into its platform, which undoubtedly will help draw in ad dollars as well. It will stream two live NFL games on Christmas Day and hopes to draw in more live events and games, without becoming dependent on sports rights. Netflix will also become home to WWE's popular live Monday Night Raw in the U.S., Canada, U.K. and Latin America starting in 2025. These weekly shows will also give Netflix solid inventory to run its ads.

Turning to guidance, Netflix increased both its full-year revenue and operating margin forecasts. It now expects to grow revenue this year by between 14% and 15%, up from a prior forecast of 13% to 15% growth. Operating margin is now expected to come in at 26% versus 25% previously. The company is still looking to generate about $6 billion in free cash flow this year.

For the third quarter, the company forecast revenue to grow by nearly 14% to $9.7 billion and for EPS of $5.10.

Image source: Getty Images.

Is it time to buy Netflix's stock?

Netflix's Q2 results show a company that still has solid momentum in its business, as it nicely grew membership across each of its regions. Over the next few years, the company should transition to a more hybrid model as advertising becomes a larger part of its business.

This is a big opportunity for the company. It has a huge viewing audience and with advertisers looking to reach streaming viewers, the company should be able to capitalize on this in the future. This opportunity is not only with ad-tier plans, but also with ad-supported live events and by introducing other more non-invasive ads, such as with placements on its landing screen or when people pause a show.

Netflix trades at a forward price-to-earnings (P/E) ratio of under 29 times based on 2025 analyst estimates. The stock has often traded above of 40 times P/E ratio in the past.

NFLX PE Ratio (Forward 1y) data by YCharts

Given the advertising opportunity the company has over the next several years along with its current valuation, this looks like a good opportunity to buy Netflix shares. While ads aren't expected to drive its revenue this year or next, they should become the driving force behind its growth in the coming years.

Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy .